Another factor to consider here is that some members of the Federal Reserve have been quite vocal about the paring back in its monthly bond-buying program possibly before the year is out. Known as QE3, this bond-buying program has helped to artificially keep lending rates low. When this program is wound down, rates may begin to rise, which would be of great benefit to the investment portfolios of insurance companies which often conservatively invest the bulk of their cash in government-backed Treasuries. To put it another way, a big boost in investment income should be right around the corner for Tower Group.
When you tack on the fact that Tower Group is trading at just 5% more than its book value, just eight times next year’s earnings, and pays out a whopping 3.8% yield, I believe you have all the reasons needed to support a continuing rally.
The Boeing Company (NYSE:BA)
Not to disappoint my contrarian thinkers who are always looking for a good short-sale idea, may I suggest America’s pride of the skies? That’s right, The Boeing Company (NYSE:BA).
The run in shares of Boeing since the spring has been nothing short of phenomenal and dumbfounding from a skeptic’s standpoint. Boeing’s second-quarter earnings report released two weeks ago certainly alluded to some positives that optimists could latch onto. Bottom-line profits easily came in higher than expected as the company announced strong orders from Asia and Latin America.
However, I can’t help but notice how much of a PR blunder and top-line growth deterrent the 787 continues to be. While I’m not ignorant to the fact that the 787 represents the future of Boeing, and potentially international aviation, the years of blunders and delays have tarnished its reputation. By contrast, the Boeing 737 remains the company’s bread-and-butter aircraft and the primary reason it posted such strong results last month.
Another overlooked aspect of Boeing is its military segment, which is expected to struggle over the coming years as the U.S. defense budget is constrained by the sequester. Sales fell 4% year-over-year and represented about 18% of total quarterly revenue.
What this comes down to is a simple case of valuation. I’m sure current shareholders are thrilled to see Boeing over $100 a share, but with expected top-line growth of only 4% this year, the threat of labor union strikes an ongoing threat, and the company now valued at 15 times forward earnings — Boeing is the most expensive it’s been in years. I’m not exactly sure how Boeing improves the image of its 787 or boosts defense/security orders quickly enough to justify the rapid increase in its share price, and I would consider the company an excellent short-sale candidate here.
The article 3 Stocks to Get on Your Watchlist originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams owns shares of Aeterna Zentaris, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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